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Civil Reference No. 8 of 1948, decided on 19th June, 1951.
(a) Income‑tax Act (XI of 1922)------
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Ss. 4 (1) (c), 42 (3)‑Goods manufactured by assessee outside British India‑Sold in British India through another firm‑Profits, held, did not arise or accrue exclusively in British India‑Profits to be apportioned in terms of subsection (3) of S. 42.
The business activity of the assessee consisted of (1) the extraction of timber, (2) the manufacture of shooks and (3) the sale of shooks. The first two activities were carried on outside British India, but the third activity qua the transactions in question was confined to British India.
Held, if the assessee's case fell under clause (c) to sub section (1) of section 4, the provisions of section 42, including those of subsection (3) to that section were immediately attracted by reason of the fact that the Kashmir Company effected the sales in British India through a business connection.
The profits on the sale of shooks did not exclusively accrue or arise An British India and such profits should have been apportioned in terms of subsection (3) of section 42.
(1950) 18 I T R 472 rel.
(b) Income‑tax Act (XI of 1922)----
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Ss. 4 (1) (a), 66 (1)‑Profits whether received in British India‑Finding, whether based on any material‑Question of law, not of fact‑Determining circumstances.
The real point that arose in the case was whether the Tribunal were right in holding that the profits in question were received in British India by or on behalf of the assessee i.e., the Kashmir Company. The assessee asked the Tribunal to refer this question to the High Court, but they referred to do so on the ground that the question was purely one of fact.
Where the point is whether the finding about the receipt of thy profits was based on any material, the question at once becomes one of law.
In order to determine whether the profits in question were received in British India by or on behalf of the Kashmir Company it was necessary to examine the nature of the connection between the two companies qua the transactions in question.
(1946), 14 I T R 417 and A I R 1932 P C 165 ref.
(c) Income‑tax Act (XI of 1922)
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-----S. 66 (1)‑Rejection of accounts by Tribunal and application of flat rate of profits‑Not question of law.
The question relating to the Tribunal's power to reject the accounts in the circumstances of the case and apply a flat rate of profits is not a question of law which the Tribunal should be directed to state.
(d) Excess Profits Tax Act (XV of 1940)------
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S. 5‑Act does not touch profits received in British India‑Income‑tax Act, 1922, S. 4 (1) (b).(c).
The Excess Profits Tax Act does not touch profits that are merely received into British India. Subject to certain qualifica tions, it is concerned only with profits that are computed in the total income of an assessee by reason of their accrual in the circumstances mentioned in the clauses (b) and (c) of subsection (1) of section 4 of the Income‑tax Act:
P. C. David for Petitioner.
Muhammad Hussain for Respondent.
MUHAMMAD MUNIR, C. J.
‑This is a reference by the Allahabad Bench of the Income‑tax Appellate Tribunal under subsection (1) of section 66 of the Indian Income‑tax Act. In order to bring out the real issues in the case a detailed statement of the facts is necessary.
The name of Sir William Roberts is associated with two joint stock companies. One of these, Sir William Roberts Timber Co. Ltd. (hereinafter called the Kashmir Company) is g private limited Company incorporated in the State of Kashmir. The other, Sir William Roberts (Shahdara) Timber Co. Ltd. (herein after referred to as the Lahore Company) has its head office in Lahore and was, before the Partition, incorporated in India. The former, which had its registered office at Baramula, took forest coupes on lease in the Kashmir State and extracted timber from there. Some timber was sold in the State and the rest was used in the manufacture of shooks in the company's factory at Baramula. These shooks were partly sold in Kashmir and partly in India through the Lahore company. During the previous year for the year of assessment 19‑13‑44 the Kashmir company sold shooks in India to the amount of Rs. 1,45,332. As the profit and loss account of the company was not accepted by the Income‑tax Officer, Lahore, these sales were subjected by him to a flat rate of 30% profits. The application of this rate resulted in the excess of that company's income in British India over its income in Kashmir. According ly the Income‑tax Officer taxed it as a company resident in British India and also subjected it to Excess Profits Tax. On appeal, the Appellate Assistant Commissioner differed from the findings of the Income‑tax Officer. He held that since the control and management of the affairs of the company was not situated wholly in British India, the company could not be held to be a resident company and that since on the calculations made by him its income in British India did not exceed its income in Kashmir, he treated it for the purposes of, assessment as a non- resident company. In regard to the estimation of profits on the sale of shooks, he thought that the flat rate applied by the Income‑tax Officer was inadequate and that these sales should have been subjected to a flat rate of 50%. It was not clear from the Income‑tax Officer's order whether the profits oh the sale of shooks were taxed by him because they had been received in British India or because they had accrued or arisen in British India. The Appellate Assistant Commissioner went into this matter and felt that the case was governed by section 42 of the Income‑tax Act and that the entire profits on the sale of shooks could not be said to have accrued or arisen exclusively in British India. Acting under subsection (3) of that section he attributed half of the profits to the company's activity in British India and the re maining half to the operation outside British India. Since the result of these calculations was teat the company's income in British India fell short of its income outside British India the company was taxed as a non‑resident company. Both parties appealed to the Appellate Tribunal. The Tribunal found themselves unable to maintain the flat rate of 50 percent. which had been applied by the Appellate Assistant Commissioner and substituted it by the flat rate of 30% which bad been applied by the Income‑tax Officer. They, however, accepted the department's contention that the profits on the sale of shooks must be considered to have accrued or arisen and also received in British India and that for that reason the case was outside the provisions of subsection (3) of section 42. Dissatisfied with this order, the assessee applied to the Tribunal to state a case for the opinion of this Court. It was alleged in the application that in the Income‑tax case the following five questions arose :‑
(i) Whether in view of the facts and circumstances of this case the Bench was legally right in holding that the income, profits and gains of the assessee company were received in British India within the meaning of section 4 (1) (a) of the Income‑tax Act
(ii) Whether in view of the facts and circumstances of this case the Bench was legally right in holding that the income, profits and gains derived by the assessee from such sales in British India were not income, profits and gains accruing or arising, whether directly or indirectly, through or from any business, connection in British India and shall not be deemed to the income accruing within British India within the meaning of section 42 (1) of the Income‑tax Act
(iii) Whether in view of the facts and circumstances of the case section 42 (3) of the Income‑tax Act is not applicable and no allocation of profits as contemplated by the above section should have been made If so, what allocation will be justifiable in law in view of the circumstances of this case
(iv) Whether in view of the facts and circumstances of the case the Bench was right in holding the assessee company to be a resident
(v) Whether in the facts and circumstances of this case the departure made by the, British Indian Income‑tax Officer in respect of the application of margin of profit is based upon any evidence and is justified in law
In the application for reference in the Excess Profits Tax ease, six questions were alleged to arise out of the Tribunal's order. The first four of these were the same as in the Income‑tax case and the remaining two questions were suggested to be:
(vi) Whether in view of the facts and circumstances of the case the Bench was legally right in holding that the assessee company is liable to pay Excess Profits Tax on Rs. 12,925
(ii) Whether now on findings of the Bench that the present case is covered by section 4 (1) (a) of the Income‑tax Act, the Bench was legally right in holding that the assessee company was liable to pay any Excess Profits Tax particularly in view of the language of section 5 of the‑Excess Profits Tax Act of 1940
For the reasons given by them in their statement of the case, the Tribunal thought that only two questions arose in both the cases, namely:
(1) Whether on the facts of the case the profits made by the Assessee on sales of Rs. 1,45,332 made at Lahore ,through Sir William Roberts (Shahdara) Timber Co. Ltd., accrued or arose in British India within the meaning of section 4‑A (c) of the Indian Income‑tax Act
(2) Whether on the facts of the case as found by the Tribunal, any portion of the profits or sales of shooks made at Lahore of Rs. 1,45,332 fall to be apportioned in terms of section 42 (3) of the Indian Income‑tax Act
Among the questions suggested by the assessee two questions should be specially noticed at this stage. One of these was question No. (v) in the Income‑tax case which asked whether the application of a fiat rate of 30% profits to the sale of shooks was justified by law or evidence and the other which was the very first question in that case inquired whether on the facts found by the Tribunal they could have arrived at the result that the profits and gains on the sales of shooks in British India could be said to have been received in British India by the assessee or on behalf of the assessee. The Tribunal have refused to refer these two questions, because they consider that these were purely questions of fact and did not raise any question of law. The assessee alleges that the statement of the case is not complete and that questions Nos. (i) and (vi) in its application for reference arise directly and that Li the form in which the assessee had required the Tribunal to state them they raised issues of law which the Tribunal were bound to refer. Accordingly, the assessee has urged that the statement of the case be remitted back to the Tribunal with the direction that these two questions should also be stated for this Court's opinion. In order to dispose of this contention it is necessary to examine the whole legal position to bring out the issues on which the correct decision of the case depended and to consider whether the two questions which the Tribunal have declined to state are purely questions of fact or in the circumstances of the case question of law. We have already pointed out that the shooks which are manufactured in Kashmir are partly sold in British India through the Lahore company. The statement recites that the latter company is the agent of the former company though it does not mention the facts on which the finding as to agency is based. From the manner in which this case has been dealt with it seems to be obvious that the Income‑tax Officer considered sub-section (1) of section 42 of the Act to be applicable and that the assessment has in fact been made through the Lahore company as the agent of the Kashmir company. This could be the only meaning, if what the Appellate Assistant Commissioner states in his order, namely, that the Kashmir company "has been assessed through Messrs Sir William Roberts & Co., Lahore, as its agents" is correct. It is true that the Tribunal have held the case to be outside the provisions of section 42, because the profits have been held by them to have been received in British India by or on behalf of the Kashmir company. They have not, however, examined the effect of this finding on the method of assessment to Excess Profits Tax, matter to which we shall refer presently.
With a view to comprehending the precise legal position it is necessary to examine the scheme of the Act in so far as it has a bearing on the present case.
By section 3 of the Income‑tax Act, tax has to be charged for a financial year in respect of the total income of the assessee for the previous year. Section 4 defines what total income is in the following manner:
"(1) Subject to the provisions of this Act, the total income of any previous year of any person includes all income, profits and gains from whatever source derived which‑
(a) are receive) or are deemed to be received in British India in such year by or on behalf of such persons, or
(b) if such person is resident in British India during such year.
(i) accrue or arise or are deemed to accrue or arise to him in British India during such year, or
(ii) accrue or arise to him without British India during such year, or
(iii) having accrued or arisen to him without British India before the beginning of such year and after the Ist day of April 1933, are brought into or received in British India by him during such year, or
(c) if such person is not resident in British India during such year, accrue or arise or are deemed to accrue or arise to him in British India during such year."
Clause (c) of section 41 declares a company to be resident in British India in any year (a) if the control and management of its affairs situated wholly in British India in that year or (b) if its income in British India in that year exceeds its income arising without British India in that year. As the terms of section 42 of the Act are material to the determination of the points involved in this case, subsections (I) and (3) of that section also need reproduc tion. They are in these terms :‑
"(1) All income, profits or gains accruing or arising whether directly or indirectly, through or from any business connection in British India, or through or from any property in British India, or through or from any asset or source of Income in British India, or through or from any money lent at interest and brought into British India in cash or in kind, shall be deemed to be income accruing or arising within British India, and where the person entitled to the income, profits or gains is not resident in British India, shall be chargeable to Income‑tax either in his name or in the name of his agent, and in the latter case such agent shall be deemed to be, for all the ‑ purposes of this Act, the assessee in respect of such Income‑‑tax ;
(3) In the case of a business of which all the operations are not carried out in British India, the profits and gains of the business deemed under this section to accrue or arise in British India shall be only such profits and gains as are reasonably attributable to that part of the operations carried out in British India."
It is clear froth the terms of the sections reproduced above that tax for a particular financial year has to be paid on the total income of the assessee for the previous year and that total income under section 4 of the Act has to be calculated either on the receipt or the accrual basis or on both basis. If income, profits and gains, from whatever source derived, are received or are deemed to be received id British India in the, previous year by or on behalf of a person, that person is liable to Income‑tax whether he is or is not resident in British India. The test under this provision is the place of receipt of income and not the residence of the person receiving it. But on general principles a person, who is a resident of British India, is liable to tax in respect of his total income, whether that income accrues to him in British India or elsewhere and this position is recognised by clause (b) of section (4) (1) which declares that all persons resident in British India during the previous year are liable to have included to their total income, any income which accrues or arises or is deemed to accrue or arise to them in British India during the previous year or which accrues or arises to them without British India during such year, or which having accrued or arising to them without British India during a particular period as brought into or received by them in British India during the previous year. In the case of a person who is not resident in British India, only such income is liable to be included in his total income as has accrued or arisen or is deemed to have accrued or arisen to him in British India during the previous year. This is recognised by clause (c) of the first subsection of section 4.
In the present case, therefore, if the profits and gains from the sales of shooks were received in British India or could be deemed to have been received in British India in the previous year they could be included in the total income of the person who received them if they were received in British India by him or by someone else on his behalf during the previous year, irrespective of whether their owner was or was not a resident of British India. Accordingly, if the Tribu nal's finding that such profits were received 'in British India during the previous year by or on behalf of the Kashmir company is correct, no other question would arise in the case and the profits in question would be liable to tax under section 3 read with section 4 (1) (a). But, as already pointed out, besides the income received in British India some other incomes are liable to be included in the total income of a person. Such cases are mentioned in clauses (b) and (c) of subsection (1) of section 4, according to which in the case of a person resident in British India, the income that accrues or arises or is deemed to accrue or arise to him in British India during the previous year, or which accrues or arises to him without British India during such year, has to be included in his total income. If the person concerned is not a resident in British India, by reason of clause (c) be is liable to have included in his total income all such income as accrues or arises is deemed to accrue or arise to him in British India during the previous year. Sections 3 and 4 contain the main provisions relating to the taxability of income, but so far as the liability of non‑residents is concerned, the Legis lature reverts to it again in section 42 which provides that income profits or gains accruing or arising in any of the manners mention ed therein, shall be deemed to be income, profits or gains accruing or arising within British India and that where the person entitled to such income, profits or gains is not resident in British India, that income or those profits or gains shall be chargeable to tax either in his name or in the name of his agent in British India and in the latter case the agent shall be deemed to be the assessee in respect of such Income‑tax. This section must, therefore, be considered to be an explanation to clause (c) to subsection (1) of section 4, according to which a person who is not a resident in British India during the previous year, is liable to tax on income that accrues or arises or is deemed to accrue or arise to him in British India during the previous year. When this clause is read with section 42, the result is that even persons who are non-residents but to whom income accrues in any of the manners stated in that section becomes liable to pay tax. This result is attained by section 42 directing that income, profits and gains‑accruing or arising directly or indirectly through any of the means mentioned therein have to be deemed to be income accruing or arising within British India and the moment such income profits or gains acquire that description they become taxable under section 3 read with clause (c) to sub section (1) of section 4, which directs to be included in the total income of a non‑resident not only income that accrues or arises to him in also income which is deemed to accrue or arise to him but British India.
It is, therefore, obvious that if section 42 applies to this case, effect will have to be given to subsection (3) of that section which quali9es the general provision in subsection (1). Under sub section (3) in the case of a business of which all the operations are not carried on in British India, the profits and gains of the business deemed under that section to accrue or arise in British India shall be only such profits and gains as are reasonably attributable to that part of the operations which is carried on in British India.
The Appellate Assistant Commissioner was throughout under the impression that the Kashmir Company had been assessed through the Lahore Company under subsection (1) of section 42, and, if tie was right in that assumption, he was if taxability in the present case was determined only by accrual, bound to apply the pro visions of subsection (3), because the profits had accrued on the sale of shooks which had been manufactured in and imported from Kashmir and in the case of such business it is settled law that profits cannot be said exclusively to accrue where the product is sold. The leading authority on this subject is the recent decision of the Supreme Court of India in Commissioner of Income‑tax, Bombay v. Ahmad Bhai Umarbhai & Co., Bombay ((1950) 18 I T R 472). In that case the assessee were a firm resident in British India who carried on the business of manufacturing and selling groundnut oil. They had three mills in Bombay and one at Raichur in the Hyderabad State where oil was manufactured. The oil that was manufactured at Raichur was sold partly in Raichur and partly in Bombay. The assessees contended that a part of the profits derived from sales in British India of the oil manufactured at Raichur was attributable to the manufacturing operations at Raichur and that such profits should be excluded from assessment to Excess Profits Tax under the third proviso to section 5 of the Excess Profits Tax Act, 1940. The department, on the other hand, contended (i) that the manufactur ing operations carried on at Raichur did not constitute a part of the assessee's business within the meaning of the third proviso to section 5, and (ii) that even if such operations could be regarded as a part of the business the profits derived from sales in Bombay could not be said to have accrued or arisen in that State. All the six Judges, who heard the appeal, agreed in holding that the activity which the assessee carried on at Raichur was a part of their business within the meaning of the third proviso to section 5, that the profits of a part of the business, viz., the manufacturing of oil in their mills at Raichur, accrued or arose at Raichur and that such profits were not assessable to Excess Profits Tax. Dealing with the question of accrual of profit, Kania, C. J. observed:
"The next contention of the appellant was that even if a part of the business was in an Indian State the profits accrued or arose only on the sale of the oil in Bombay and no part of the profits of manufacture therefore arose in an Indian State In my opinion this argument is also unsound. On the sale of goods the assessee receives money. While the receipt of the price is thus in Bombay, it is an entirely different thing to say that, therefore, the whole profits of the manufacture and sale arose in Bombay. This argument overlooks the distinction between accruing or arising on the one hand and receipt on the other. Again, the question of profits has to be determined not on receipt of the price of each lot sold by the assessee but the result of all the operations in connection with the manufacture and sale of oil during the accounting year. An individual transaction may result in profit but that will not make the assessee liable if the result of his accounting year's activities is a loss. It is, therefore, improper in a case of this kind to consider the sale of oil as the deciding factor either to ascertain profits or to determine the place of the accrual of profits. Several cases were cited at the Bar dealing with a trader's business where he bought and sold goods. In my opinion those are not relevant to determine the question before us because in the present case the business is of a different nature."
The reasoning of Mahajan, J., ran in a similar strain. He said at p. 495 of the report :‑
On behalf of the Commissioner it was contended that the place where the profits accrue or arise is not ordinarily the place where the source that produces the profits is situate and that the High Court had erred in taking the view that in respect of sales of oil in British India produced by the mill at Raichur any profits accrued at the place of manufacture. It was said that profits in such, a case only accrue at the place of sale and not at the place of manufacture. I am unable to accede to this contention. It is true that no profits are realised until the oil is sold but the act of sale merely fixes the time and place of receipts of profits. Profits are not wholly made by the act of sale and do not necessarily accrue at the place of sale. Act of sale is the culminating process in the earning of profits but it goes without saying that the act of sale could not be performed unless the goods were produced at Raichur and it would be wrong from a business point to say that all the profits resulted from that operation. It was the operation of manufacture at Raichur that enabled the assessee to sell oil and some portion of the profits must necessarily be attributable to the manufac turing process. To the extent that the profits are attributable to the manufacture of oil it is not possible to say that they accrue or arise at any place different from the place where t‑he manufactured article came into existence."
In the present case, the business activity of the assessee consist ed of (1) the extraction of timber, (2) the manufacture of shooks and (3) the sale of shooks. The first two activities were carried on outside British India but the third activity qua the transactions in question was confined to British India. If, therefore, the assessee's case fell under clause (c) to subsection (1) of section 4, the provisions of section 42, including those of subsection (3) to that section were immediately attracted by reason of the fact that the Kashmir Company effected the sales in British India through a business connection. Therefore in the present case if the liability were determined only by clause (c) to subsection (1) of section 4, the answer to the questions referred by the Tribunal would be that the profits on the sale of shooks did not exclusively accrue or arise in British India and that such profits should have been apportioned in terms of subsection (3) of section 42.
In their statement of the case and their order under section 33, however, the Tribunal state that the profits not only accrued or arose in British India, they were also received in British India. Now, if their finding be correct that the profits in question were received in British India during the previous year by or on behalf of the assessee, then the profits were taxable under clause (a) to subsection (1) of section 4, irrespective of whether the assessee was or was not a resident. The question of the residence of the assessee became material in this case only in connection with the assessability of the income accruing to it outside British India, i.e., the State of Kashmir. If the result of taxing the profits on receipt basis made the income of the assessee in British India exceed its income in Kashmir, the assessee could rightly have been treated, as it actually was, by the Tribunal as a company resident in British India under clause (c) to section 4 (A) of the Income‑tax Act. But in that case the two questions that have been referred by the Tribunal would not have arisen because, as already pointed out, where a person is assessed on receipts basis under clause (a) to subsection (1) of section 4 his residence is wholly immaterial. The basis of taxability in such a case is the place of receipt of profits and not the place of their accrual or the residence of the assessee. The real point, therefore, that arises in the case is whether the Tribunal were right in holding that the profits in question were received in British India by or on behalf of the assessee, i.e., the Kashmir company. The assessee asked the Tribunal to refer this question to this Court, but they refused to do so on the ground that the question was purely one of fact. It is true that this question is ordinarily one of fact, but where the point is whether the finding about the receipt of the profits was based on any material, the question at once becomes one of law. In recording their finding on this aspect of the case the Tribunal seem to have been influenced merely by the consideration that the sale of shooks took place in British India where the sale price was paid. This, however, is never a determining circumstance. We have already said that the Lahore company has been treated by the Tribunal as the agent for Kashmir company though it is not clear, nor is it stated, on what material the Tribunal arrived at this finding. In order to deter mine whether the profits in question were received in British India by or on behalf of the Kashmir company, it was necessary to examine the nature of the connection between the two com panies qua the transactions in question. On the present state of the case, all that can be said is that the sales were effected by the Lahore company who also received the price. It nowhere appears from the statement of the case whether the Lahore company sold to their customers as principal to principal or on behalf of an undisclosed principal, or as agent of a dis closed principal. Nor does the statement disclose how the Lahore company was held to have received the profits on behalf of the Kashmir company. If a foreign company sells its goods in British India through a servant or a salesman as was the case in Hira Mills Ltd., Cawnpore v. Income‑tax Officer, Cawnpore ((1946) 14 I T R 417), who also receives the price on behalf of the company, it may be that clause (a) to subsection (1) of section 4 becomes applicable. Profits may also be said to have been received in British India where they are received by a person in British India on behalf of a foreign company in pursuance of an authority given to him for the pur pose and are subsequently remitted by him to his principal abroad. This was the position in Pondichery Railway Co. Ltd. v. Com missioner of Income‑tax, Madras (A I R 1932 P C 165). But the peculiar feature of that case was that the agent received and under standing instructions distributed a part of the profits after they had been determined by the working agent of the foreign company. In the present case, we do not know on what material the findings as to agency has been recorded and what was the nature of the business connection between the two companies. Before, therefore, we finally dispose of this reference, we would require the Income‑tax Appellate Tribunal to re‑state all the relevant facts in regard to the receipts of profits on behalf of the assessee. We direct the Tribunal to state the case on the first question which had been framed by the assessee in its application for reference and which the Tribunal refused to refer on the ground that it was a question of fact. Neither in their order under section 33, nor in the statement of the case have the Tribunal given there reasons for the view that the payment of sale‑price of the shooks to the Lahore company amounted to a receipt of the profits by or on behalf of the Kashmir company. The question on which case is to be re‑stated is:‑
"Whether there was any material to support the Tribunal's finding that the entire profits on the sale of shooks were received in British India during the previous year by or on behalf of Sir William Roberts Timber Co., Ltd., Baramula "
We cannot accede to the assessee's request that the question relating to the Tribunal's power to reject the accounts in the circumstances of the case and apply a flat rate of profits is a question of law which the Tribunal should be directed to state.
In the application for reference in the Excess Profits Tax case one of the questions that the Tribunal were required to state was whether on the findings of the bench that the present case was covered by section 4 (1) (a) of the Income‑tax Act the bench was legally right in holding that the assessee company was liable to pay any Excess Profits Tax. In view of what we have already said it appears to us that this question did arise in this case and that the Tribunal were not right in declining to refer it to this Court. By section 5 of the Excess Profits Tax Act that Act only applies to businesses of which any part of the profits is chargeable to income‑tax by virtue of the provisions of sub‑clause (i) or sub clause (ii) of clause (b) of subsection (1) of section 4 of the Indian Income‑tax Act or of clause (c) of that subsection. By the third priviso to section 5 where the profits of a part of a business accrue of arise in an Indian State, such part shall be deemed to be a separate business the whole of the profits of which accrue or arise in an Indian State, and the other parts of the business shall be deemed to be a separate business. It is, there fore, obvious that the Excess Profits Tax Act does not touch profits that are merely received into British India and that, subject to certain qualifications it is concerned only with profits that are computed in the total income of an assessee by reason of their accrual in the circumstances mentioned in clauses (b) and (c) of subsection (1) of Section 4 of the Income‑tax Act. Accordingly, even if the Tribunal were right in taxing the profits from the sale of shooks under clause (a) of subsection (1) of section 4 of tie Income‑tax Act because of their having been received into British India, they could not, for that reason alone, hold such profits liable to Excess Profits Tax, and were bound to give effect to the third proviso to section 5 of the Excess Profits Tax Act and allocate a part of the profits to the business in British India where the shooks were sold and a part of the business in the State of Kashmir where the shooks were manufactured. For these reasons we direct the Tribunal to refer to thi3 Court this part of the case in their supplementary statement. The matter may by referred either in the form of the question suggested by the assessee or in the form of another suitable question. Any documents to which the Tribunal may have to refer in their statement will be appended to the Statement. Statement to be submitted within two months.
[Tribunal was directed to make Supplementary statement].
SUPPLEMENTARY STATEMENT OF THE CASE
In compliance with the order made by the Hon'ble High Court of Judicature at Lahore under section 66 (2), we hereby state the case. There are two joint stock companies in each of which Sir William Roberts holds majority of shares. One of these, Sir William Roberts Timber Co. Ltd. (hereinafter called "the Kashmir Company") is a private limited company incorporated in the State of Kashmir. The other, Sir William Roberts (Shahdara) Timber Co. Ltd. (hereinafter referred to as "the Lahore Company") has its head office in Lahore and was, before the Partition, incorporated in India. The former, which had its registered office at Baramula took forest coupes on lease in the Kashmir State and extracted timber from them. Some timber was sold in the State and the rest was used in the manufacture of shooks in the company's factory at Baramula. These shooks were partly sold in Kashmir and partly in India through the Lahore Company. During the "previous year" relevant to the assessment year 1943‑44, the Kashmir company sold shooks in India to the tune of Rs. 1,45,332.
2. Originally, the Lahore company only used to be assessed in Lahore and the Kashmir company was not on the file of the Department. During the assessment proceedings of the Lahore company for the charge year 19.13‑44, the Income‑tax Officer dis covered that there were some business transactions between the two companies. The Income‑tax Officer not having had full facts before him, the Kashmir company was tentatively taken to be a foreign company. A notice under section 43, second proviso, was issued to the Lahore company calling upon it to show cause why it should not be treated as an "agent" of the Kashmir company for assessment to British Indian tax. In response to the said notice Mr. Herbert Roberts, General Manager of the Lahore company, and Mr. Amolak Ram Pasricha, Director of the Kashmir company, appeared before the Income‑tax Officer had admitted that the Lahore firm had business connection with the Kashmir company and that profits did accrue or arise to the non‑resident company through the Lahore firm." Thereupon the Income‑tax Officer passed an order under section 43, treating the Lahore company as the agent of the Kashmir company. A notice under section 22 (2) was accordingly served on the Kashmir company through the Lahore company on the 4th of November, 1943. The notice was addressed in the manner following ;
"To
Sir William Roberts Timber Co., Ltd.,
Baramula, Kashmir State,
Through Sir William Roberts & Co.,
Jodhamal Buildings,
Lahore."
This notice was passed on by the Lahore Company to the Kashmir Company and the latter company acknowledged receipt of the notice in its letter, dated the 18th of November, 1943, which was addressed to the Income‑tax Officer. The Kashmir company wrote another letter to the Income‑tax Officer on the 20th of December, 1943, asking for an adjournment on the ground that "the Kashmir I. T. O. had not completed the assessment." All subsequent notices, as for instance, those issued under sections 22 (4) and 23 (2) and the demand notice, were served on the Kashmir company "through the Lahore Company" and were later passed on to the Kashmir company.
3. The Kashmir company (assessee) filed a return on the Ist of February, 1944, under the signature of Mr. Amolak Ram Pasricha, Director and Manager of the Kashmir company, and a certified copy of the assessment order made by the Kashmir Income‑tax Officer was attached to the return, One of the items brought under assessment by the Kashmir Income‑tax Officer was :‑
(i) Sales of wood boxes made in British India by the company to Messrs Lever Brothers of Bombay through their Agents, Sir William Roberts & Co., Lahore, stand at Rs. 1,45,332. A net flat rate of 20% is applied on this turnover. Profits comes to Rs. 29,067.
The return filed by the Kashmir company in Lahore declared the British Indian income against "Section A" at Rs. 29,067 and this is precisely the income which was worked out by the Kashmir Income‑tax Officer by applying a net flat rate of 20%. to sales of Rs. 1,45,332. The statement of profit and loss account filed along with the return shows the sales of Rs. 1,45,332, as a separate item distinct from other items of saps made in the Kashmir State. Before us it was faintly suggested that the assessee (Kashmir company) had made an outright sale of these shooks to the Lahore company for Rs. 1,45,332 and the Lahore company in turn sold them away to outsiders in British India. This allegation is contrary to the admitted facts in the present case. As we have already pointed out earlier, the Kashmir Income‑tax Officer had distinctly treated the amount in question as representing sales made in British India by the Kashmir company to Messrs Lever Brothers Bombay, through their Agents, the Lahore company. Besides, the Lahore Income‑tax Officer had definitely held that "the company sold shooks of the value of Rs. 1,4,332 to Messrs Lever Brothers, Bombay, through Sir William Roberts & Co. Lahore". This finding was not objected to in the memo. of appeal filed before the Appellate Assistant Commissioner.
4. It is admitted that the Lahore company received payment from Lever Brothers, Bombay, by Telegraphic transfer through the Imperial Bank, Lahore. This sum was credited to the Lahore comp any's account with the Imperial Bank, Lahore. Later, the Lahore company passed on the amount in question, namely, the sum of Rs. 1,45,332, to the Kashmir company by drafts on the Imperial Bank of India, Srinagar. On these facts the Income‑tax authorities; as well as the Tribunal, came to the conclusion that the sales of shooks were made in British India by the Kashmir company through their agents, the Lahore company, and the entire profits included in the sale proceeds of the shooks were received in British India by the "agents of the assesses company" on behalf of the Kashmir company.
5. In an application under section 66 (1) the assessee for mulated the following question for reference to the Hon'ble High Court :‑
"Whether in view of the facts and circumstances of this case the Bench was legally right in holding that the income, profits and gains of the assessee company were received 'in British India within the meaning of section 4 (1) (a) of the Income‑tax Act '
The Bench (as it then was constituted) refused to refer this question on the ground that it was a question of fact. Thereupon the Hon'ble High Court has directed us to re‑state the case on the following question :‑
"Whether there was any material to support the Tribunal's finding that the entire profits on the sale of shooks were received in British India during the previous year by or on behalf of Sir William Roberts Timber Co. Ltd., Baramula "
6. Under section 66 (2), we, therefore, refer the following question for the opinion of the Hon'ble High Court :‑
"Whether there was any material to support the Tribunal's finding that the entire profits on the sale of shooks were received in British India during the previous year by or on behalf of Sir William Roberts Timber Co. Ltd., Baramula "
66 R. A. No. 229 of 1946‑47
7. We now come to the question arising out of the excess profits tax assessment in respect of the chargeable accounting period beginning the 1st of October, 1941, and ending the 30th of October, 1942. The facts connected with the sale of shooks in British India have been set out in the foregoing paragraphs.
It is common ground that the business activities of the assessee consisted in (1) the extraction of timber, (2) the manufacture of shooks ; and (3) the sale of shooks. The first two activities were carried on outside British India, but the third activity qua the transaction in question was confined to British India. It is now admitted by both the parties that "part of the business activities were carried out in Kashmir and part in British India." The assesses, however, maintains that the entire profits on the sales of shooks effected in British India to the tune of Rs. 1,45,332 accrued or arose to the assessee in the Indian State, whereas the Depart ment maintains the other extreme view, namely, that the entire profits should be deemed to have accrued or arisen to the assessee in British India. Their Lordships, however, have quoted with approval the following observation made by Mahajan, J. in Commissioner of Income‑tax, Bombay v. Ahmedbhai Umarbhai & Co. ((1950) 18 I T R 472):‑
"It is true that no profits are realised until the oil is sold but the act of sale merely fixes the time and place of receipt of profits. Profits are not wholly made by the act of sale and do not necessarily accrue at the place of sale. Act of sale is the culminating process in the earning of profits but it goes without saying that the act of sale could not be performed unless the goods were produced at Raichur and it would be wrong from a business point to say that all the profits resulted from that operation. It was the operation of manufacture at Raichur that enabled the assessee to sell oil and some portion of the profits must necessarily be attributable to the manufacturing process. To the extent that the profits are attributable to the manufacturing of oil it is not possible to say that they accrue or arise at any place different from the place where the manu factured article came into existence."
It must be conceded, and it is now agreed by both the parties, that the excess profits tax does not touch profits that are merely received in British India and that, subject to certain qualifications, it is concerned only with profits that are computed on the total income of the assesses, by reason of their accrual in the circumstances mentioned in clauses (b) and (c) of subsection (1) of section 9 of the Income‑tax Act. That being so, it is now conceded by the parties that on the findings of the Tribunal that the present case was covered by section 4 (1) (a) of the Income‑tax Act, the Tribunal was not legally right in holding that the assessee was liable to pay any excess profits tax. In view, however, of the facts stated above and the admission made by the parties, it is quite clear that the activity which the assessee carried on at Baramula in the Kashmir State was a part of their business within the meaning of the 3rd proviso to section 5 of the Excess Profits Tax Act and the profits attributable to that part of the business, namely, extraction of timber and the manufacture of shooke, accrued or arose in the Indian State and such profits were not assessable to excess profits tax. The profits that can be attributed to the selling process of the entire activities should be taken to have accrued or arisen in British India and are as such assessable to excess profits tax. In this connection, we respectfully suggest that the proportion of profits fixed by the Appellate Assistant Commis sioner in this behalf is fair and reasonable. One‑half of the profits should be taken to have accrued of arisen in the Indian State and the other moiety to have accrued or arisen in British India.
8. The assessee's contention in a nutshell is that no part of the profits is assessable to excess profits tax because, notwith standing the fact that part of the activities was carried on in British India, the entire profits on the sale of Rs, 1,45,332 accrued or arose in the Indian State. The Department maintains that not withstanding these facts the part of the business carried on in the Indian State does not constitute "separate business" within the meaning of the 3rd proviso to section 5 of the Excess Profits Tax Act on the facts found the assessee has suggested the following questions which we have adopted with slight alterations and which we respectfully refer to the Hon'ble High Court under section 66 (2) read with section 21 of the Excess Profits Tax Act :‑
"1. Whether, in the facts and circumstances of the case, the excess profit on the sale of Rs. 1,45,332 is at all liable to excess profits tax under section 5 of the Excess Profits Tax Act "
If the answer to the above question be in the affirmative :‑
"2. Whether, in the facts and circumstances of the case, the Bench was legally right in not treating the manufacturing part of the business as a separate business within the meaning of the 3rd proviso to section 5 of the Act and in not excluding from the assessment the profits of that part of the business which accrued or arose in the Kashmir State ''
The Departmental Representative suggests that the second question should be numbered as (1) and the first question should come next. We do not see any force in this objection.
MUHAMMAD MUNIR, C. J.
‑This is in continuation of our order of 19th June, 1951 and the supplementary statement of the case by the Tribunal. To the question now referred by the Tribunal in the income‑tax case our answer, on the facts stated, is in the affirmative.
The reply to the questions referred in the Excess Profits Tax case is that the case is governed by the second part of the third proviso to section 5 of the Excess Profits Tax Act and that, there fore, only the profits attributable to sales in British India are liable to Excess Profits Tax and not the profits attributable to the business of extraction of timber and manufacture of shooks in Kashmir. Parties will bear their own costs of both references.
Reference answered in the affirmative.
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